5 Reasons Costco Is a Buy
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According to the U.S. Census Bureau, the latest survey of retail and food services in America indicates that monthly sales increased by 5.8% on a year-over-year basis to $401.4 billion. The upward trend was recorded across practically all industries, with the exception of electronic & appliance and general merchandise department stores which actually showed small revenue pullbacks. Food services clocked the most significant jump, increasing by 8.2%. With credit conditions improving, allowing small businesses to flourish as consumers are able to resume their shopping habits, retail stores are experiencing tremendous top line growth.
Costco (NASDAQ: COST) has been able to capitalize on the trend, building 24 more warehouse locations as comparable same-store sales growth have surged by 10% over the last year. Costco warehouses carry bulk discount items which are designed to attract small businesses and individual consumers. The retailer has expanded into multiple consumer segments such as appliances, automotive supplies, tires, books, electronics, optical laboratories, luggage, appliances and clothing. Basically, Costco is a one stop shop which sells almost everything under one roof.
In its last reported quarter, Costco’s net U.S. revenue jumped 10% while international sales increased by 11%. Although larger retailers such as Wal-Mart and France’s Carrefour generate more revenue company wide, Costco sees significantly more sales per store. With 598 locations and annual revenue of $89 billion, the average Costco center realizes sales of $150 million. Wal-Mart, on the other hand, operates 9,700 locations and generates annual sales of $422 billion, an average store sale of $44 million.
As member shopping frequency continues to grow while and the number of new members significantly exceeds the membership drop off rate, the sheer volume of goods sold is astounding: $1.9 billion worth of television sets, $466 million in camera sales, 3.2 million pairs of glasses, $430 million in vacation packages, 6.5 million tires, $1.3 billion in wine sales, 225,000 cars and 100 million hot dogs were sold in fiscal 2011. Although specialty electronics and automotive retailers such as Best Buy and Ford need not immediately worry about Costco’s growing rate of diversity, the conglomerate may eventually become a significant threat.
Strong Balance Sheet
Costco has been rapidly expanding the number of locations it offers to consumers, adding 16, 13 and 20 new warehouses between 2009 and 2011 respectively, with 17 new locations expected in 2012. Most companies heavily rely on debt for large expansion projects; Costco, however, is not heavily levered with only $1.3 billion of long term debt, most of which is due in 2017, and $5.9 billion of cash on its balance sheet. Warehouses are typically profitable but face significant liquidity concerns - Costco does not face such issues.
Enhancing Shareholder Value
Additionally, management has been increasing shareholder value through a growing dividend and share repurchase program. After initiating a 40 cent dividend in 2004, the board of directors has authorized subsequent increases to its current state of $0.96. Likewise, since 2005 $6.3 billion has been allocated to share repurchases at an average price of $57 – the current share price is over $84.
Happy customers and happy employees are other key component of Costco’s prosperous business model. According to the American Customer Satisfaction Index, Costco is the #1 company in terms of customer satisfaction, with an overall rating of 83%. Other major top ranking retailers such as Staples (NASDAQ: SPLS), Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD) carry a satisfaction rating of 79%, 79% and 78% respectively. Wal-Mart carries a satisfaction percentage of only 69. Compared to its competitors, Costco has actually held the number one spot since 2006.
Furthermore, employees of the corporation are just as happy; making an average $20.34 an hour, almost a dollar more than the national mean; annual employee turnover is at a low 10%. As result, workers learn the business and are able to grow into more productive rolls. Such a culture ensures greater employee productivity and less direct & indirect training costs.
Since going public, sales and earnings have both been recording yearly double digit growth. Costco may not be the one year 10-bagger stock that some investors may be looking for but it definitely provides substantial investment opportunity and stability. Overall, the company is strong and its share price reasonable. With future prospects, especially at the international level, Costco still has room to continue its remarkable growth story.
Motley Fool newsletter services recommend Costco Wholesale, The Home Depot, Lowe's Companies, Staples and Wal-Mart Stores. The Motley Fool owns shares of Costco Wholesale, Staples and Wal-Mart Stores. apinkasovitch has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.